Difference Between Public and Private Corporations

There is a difference between public and private corporations. A private corporation stock isn't offered to the public while a public corporation is.3 min read

There is a difference between public and private corporations. A private corporation is defined as a smaller corporation where there is a limited number of shareholders that stock gets issued to, and the stock isn't offered to the public. On the other hand, a public corporation has been authorized to sell their stock to the public.

What Is a Private Corporation?

In a private corporation, the stocks are only held internally and won't be publicly traded. The founders, group of investors, or management are usually the owners. The shareholders are often very involved in the business and act as the directors and officers of the company.

Sometimes there are bigger corporations that have a larger number of shareholders who wish to stay private for multiple reasons. These reasons can include having more privacy and avoiding the expensive cost of going public and managing the requirements for a public company.

It's falsely thought that companies that are privately held are of little interest and small. However, many big companies are privately held, such as Dell, Koch Industries, Mars, Bloomberg, and Cargill.

What Is a Public Corporation?

In a public corporation, the shares are traded through a stock exchange on the open market. The companies that have a large amount of revenue and a bigger number of shareholders are often able to afford what it costs to go public and be in compliance with the multiple regulations that are imposed on companies that are public by securities laws and other types of governmental regulations.

Difference Between Public and Private Corporation

However, there are some major differences in how a private company and a public company operate.

Common Stock

A public company is one that has sold a portion or all of itself to the public through an initial public offering (IPO). This means the shareholders have a claim to a portion of the company's profits and assets. Before shares are sold through an IPO, the corporation should register them with the U.S. Securities and Exchange Commission (SEC). They need to also prepare a prospectus that has all important information disclosed about the company and all the shares they're offering.

Once this is issued, the public corporation stock can be traded on the stock exchange, assuming the company meets all mandatory listing requirements for the exchange. A private corporation's stock is not allowed to be freely traded to the public. A private corporation needs to rely on any exemptions to the requirements for SEC registration to place shares with wealthy individuals and institutional investors privately. All private offerings are controlled by the SEC's Regulation D.

Raising Funds

Public companies have an advantage of getting into the financial market by sell bonds (debt) or stock (equity) to increase capital, such as cash, for projects and expansion. Once the company gets listed, investors can move in and out of stock by selling and shares trades on the stock exchange. If more funding is required for a public corporation, it can give out extra common shares via a secondary offering. The public corporation can decide to register and issue a variety of stock if they want as well.

A large number of people share equity investment when it's a public company, as it consists of many shareholders instead of only a few. The corporation's debts need to be paid, but it's not necessary to pay shareholders if bankruptcy occurs. A primary advantage companies that are private is not having to answer to any stockholders and not needing to file a disclosure statement with the SEC. A private company cannot go into public capital markets, which means they need to turn to private funding instead.

Private companies often try to decrease the tax bite, while companies that are public look to increase their shareholders' profits. Private companies are dependent on private investments and profits for expansion and operations. Equity financiers and venture capitalists put cash into private corporations when they purchase private shares.

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